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The European private pharma sector

Published on 14/10/03 at 12:40pm

Over the past ten years, the US has overtaken Europe as the largest pharmaceutical market, despite the two serving a similar sized population. This can be attributed to several differences between the two regions, primarily stemming from the fragmented and highly regulated individual country markets in Europe, compared to the large, single, free market in the US. One key difference between the two markets is the characteristics of the associated companies. Europe is found to have a number of privately owned pharma companies that are significant players in the market, in contrast to the US, which is dominated by public companies.

European pharma market

With the population of the five largest European countries being approximately equal to that of the US, it might be expected that the size of their combined pharmaceutical markets would equal that of the US. While this was true in 1990, when Europe represented 31.9% of global pharma revenues and the US accounted for 31.2%, in recent years Europe has been falling behind the US and in 2000 made up just 22.3% of the global market, compared to the 43% held by the US.

According to the European Federation of Pharmaceutical Industries and Associations (EFPIA), 62% of the sales of new medicines marketed between 1997 and 2001 were generated in the US, compared to just 21% in Europe. Furthermore, Datamonitor's analysis of sales of the top 12 blockbuster drugs in 2000 shows that 74.5% were generated in the US, with just 8.9% coming from the top five European markets.

European pharma players

This following analysis examines leading private European pharma companies against the leading comparable public players (ethical revenues less than $6 billion), identifying the key factors that will contribute to the future growth or decline of private companies within the changing global pharma market.

The wide distribution in company sizes in the private sector is notable, with the leading company, Boehringer Ingelheim, having sales comparable to many of the public companies, and the smallest company, Grupo Uriach achieving sales of just $136 million in 2000.

Within the private sector, Boehringer Ingelheim comes out top in terms of pharmaceutical sales, with revenues of $5.7 billion in 2001. It is notable that, of all the private companies covered, Boehringer obtains the smallest proportion of its sales in its domestic market, Germany.

The European presence of private companies that often focus on in-licensed products, or the development of a me-too drug for sale in domestic markets, can be attributed in part to the regulated environment. Cost-conscious European markets do not easily reward value-added, innovative products, since these are usually more costly. Instead, lower priced drugs, me-toos and generics are often favoured. This, combined with the low penetration rate of new products in European markets resulting in lower rewards from R&D investment, can give the privately owned companies an edge, since their focus is on sustainability rather than profitability. Public companies may also have been discouraged in the past by the marked fragmentation of the European market, frequently changing regulatory frameworks and lack of predictability for companies needing to prepare their strategic plan for the medium and long term.

At 21.2% of sales, Servier made the highest proportional investment in R&D of any of the private companies examined in this analysis. It is Servier's strategy to focus purely on the in-house development of its own proprietary products and this explains its high level of R&D spend. This also accounts for Servier's low level of dependence on its domestic market. By developing its own products, a company opens up the possibility of entering international markets, either by setting up a direct presence or by out-licensing its products to companies in territories where it does not have a presence.

Menarini and Almirall demonstrate the opposite product sourcing strategy to Servier. Their portfolios mainly consist of in-licensed products, which severely limits their geographic spread. This is a common strategy in the Italian and Spanish markets, and is made possible by legislation that prevents the originator company from co-promoting products in these countries. If the originator wants to increase its market penetration it therefore has to out-license the product to a company that will market it under its own brand name. However, as the large pharma players expand their operations in these markets and as physicians gain more experience of their products, they will find less need to out-license drugs to local players.

Within these markets, therefore, it is important that companies now start to look at alternative sources of revenues. The Italian company Chiesi, for example, focuses on development partnerships rather than in-licensing, and its ability to out-license its proprietary inhaler technology means it is expanding its geographic range, at least within Europe. Its R&D spend in 2001 was low in absolute terms, but represented 12.4% of sales, which is above the average of the private companies. With limited funds to spend on R&D it is focusing on obtaining approval for use of its proprietary inhaler Modulite with a greater range of asthma medications. This will be less costly than developing a novel drug and will enable the company to out-license its technology to the wide range of companies that market the asthma medications it has in trials, hence expanding its network of alliances and boosting international sales.

Another company that is maximising the limited investment it is able to make in R&D is Pierre Fabre. This companys R&D spend reached $125 million in 2001, above the average of the private companies, but still well below the average spend of the public companies covered, which was $390 million. Pierre Fabre's strategy is to focus on the early-stage development of promising drug candidates before seeking partnership with one of the larger pharma players to take over the more costly, later stages of development. By doing this, Pierre Fabre ensures the maximum number of its development projects reach the market, and benefits from associated royalties.

As well as placing restrictions on the amount of R&D that can be conducted in-house, the small size of these companies, combined with their lack of external funding, also limits the breadth of activities that they can perform. In contrast to large pharma companies, which have the resources both to develop and market their own drugs, private European companies specialise either in marketing or in R&D. The companies are therefore reliant on partnerships for at least one of these functions, hence the scarcity of companies that both source products internally and market them independently.

Therapeutic and geographical expansion strategies

Analysis of the therapeutic strategies of the leading private pharma players suggests that few have a particularly tight therapeutic focus. This probably stems from the fact that, historically, the majority of the companies have in-licensed products to broaden their portfolios in order to leverage their position in domestic markets, in which they have previously suffered limited competition. As the companies have moved away from this strategy though, and begun to see the value in developing their own products and expanding internationally, they have become more focused on one or two therapeutic areas. Frequently, the companies pipeline products are for niche indications, which serves both to focus maximum R&D spend on one area, and to limit competition from large pharma players.

In terms of geographical expansion, there is a direct correlation between the product sourcing strategies and development outside of the domestic markets. Almirall and Menarini both primarily focus on in-licensing for their domestic markets, so have yet to demonstrate a less than 50% dependence on their home markets. Meanwhile, the companies primarily focused on co-development and in-house R&D are able to drive geographic expansion through greater control over the promotional strategies of their major products. Chiesi, for example, has re-acquired the European rights to its infant respiratory distress syndrome therapy, Curosurf, from Serono, allowing it to directly expand its marketing operations. This move allows Chiesi to maximise the returns from the product while minimising additional marketing costs through promotion of a therapy in a niche indication.


The future for the private pharma sector will ultimately depend on the development of new strategies to cope with the changing competitive environment. Companies that primarily rely on their marketing ability and knowledge of domestic markets to gain access to the products of larger companies will be challenged to compete with the expanding operations of big pharma in their domestic markets. International expansion into new markets is one of the few sources of growth left open to the major pharma players, so they will eventually move into markets such as Spain and Italy, despite the cost conscious healthcare regimes that squeeze margins.

Private companies that do conduct their own R&D, but that lack innovation, will also suffer in the future as competition increases in their domestic markets, since they will find it difficult to penetrate international markets if they are unable to offer anything that is not already provided by the dominant companies in each market. In order for such companies to survive they must seek development partnerships, possibly with biotech outfits, to boost innovation in their pipeline.

Those players with innovative products may not have the marketing strength to go it alone in international markets, so those that have an established network of alliances will fare best. As has been demonstrated in recent years, the majority of growth in pharma markets will come from the US rather than Europe, so for companies not already established in the US market, this represents a significant opportunity for expansion. It is such international expansion that contributed to the success of Boehringer Ingelheim  by exposing itself to the US market, it has greatly increased its sales potential, and by partnering with companies such as Abbott and Pfizer, it ensures it can compete with the major pharma players.

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